Strategy

Andrew Parker had a great post a few years ago where he sketched out all the startups going after pieces of Craigslist:

Startups that have tried to go head-to-head against the entirety of Craigslist (the “horizontal approach”) have struggled. Startups that have tried to go up against pieces of Craigslist (the “vertical approach”) have been much more successful (e.g. StubHub, AirBnB).

Recruiting looks like it’s going through a similar evolution. Last-generation products like LinkedIn are broad but not deep. Everyone I know who recruits uses LinkedIn, but none of them think it has solved their recruiting problems. Now we are seeing the rise of vertical solutions that are significantly better, e.g. Stack Overflow for developers and Behance for designers (at least that’s what I believe – I’m an angel investor in both).

The benefits of focusing are: 1) you can create a dramatically better user experience when it’s tailored to a specific use, 2) you can do unscalable hacks when starting out (e.g. AirBnb paying photographers to take pictures of apartments), 3) you need far fewer users to get to minimum viable liquidity, and 4) brand building is easier when you solve a straightforward, narrow problem (e.g. “I need a place to stay this weekend”).

This pattern – horizontal first, vertical second – is common. But you need to be careful. Back in 2003-2004, there was a lot of speculation that vertical search engines would eventually take down Google. A few categories worked (e.g. travel), but Google adapted in other categories (e.g. video, news) and lots of startups suffered.

BuzzFeed’s CEO, Jonah Peretti, recently sent out an email to employees and investors summarizing the company’s strategy and progress. I really liked his email so I asked Jonah if I could blog it and he gave me permission. This isn’t just the usual cheerleading email – there is a real strategy here (I especially like the strategy choice in section 3), and it’s working.

I’m an investor in BuzzFeed and friends with Jonah so of course I’m biased. But to me what makes BuzzFeed great is their highly unusual combination of capabilities and sensibilities – the capabilities of a first-rate tech startup with the sensibilities of media industry veterans. I think Jonah’s email captures this well.

As you just heard at the all hands meeting, things are going great at BuzzFeed. We passed 30M unique visitors last month, our revenue is on pace to be more than 3 times what we did in 2011, we have grown from 26 full-timers at the start of last year to 117 today, and we have published entertaining and important stories enjoyed by millions of people. Our revenue is surging as brands shift their budgets to social ads and our recent growth is driven more by revenue than VC funding – an amazing milestone for any startup. We still have a long way to go but it has been a great year so far.

Whenever a company has this kind of success the press, competitors, and the public start asking: “how do they do it??!?” Unfortunately, this speculation is often unkind and unfair. The default assumption is that a company must be cheating somehow or using some trick to grow traffic or revenue.

This skepticism is actually justified because many startups actually do use tricks or shortcuts to succeed. Some companies figure out ways to juice their numbers so they can quickly sell for millions and then a year later it all comes crashing down. The dotcom era was as famous for Geocities, Broadcast.com, and Pets.com as it was for Amazon, Yahoo, or eBay. Based on industry precedent, it is understandable that people are skeptical when a startup starts to really take off.

Nevertheless, BuzzFeed has received a very positive reception from the public, readers, our partners, and the press. But occasionally someone engages in uninformed negative speculation about us, mostly because they are confused about what we are doing. This confusion is likely to increase in the future. As we grow it is important that we help people understand what we are doing and why it is interesting and different.

In that spirit, I want to share some of my thoughts of about why things are going well, why our success is based on hard work and a unique approach, and how you might explain what we are doing to a drunk, misguided hater at a party.

Why BuzzFeed Is Succeeding Right Now?

1) Long Term Focus

When you compare web publishing today with what Hearst and Conde Nast built in the last century, it is clear that online publishing has a long long way to go. As sites like Facebook and Twitter mature, the moment is right to build a defining company for a world where content is distributed through sharing and social media instead of transitional print and broadcast channels. Why shouldn’t we be one of the companies that builds this future?

This big opportunity is why we are focused on building an enduring, independent, and self-sustaining company. Nobody has built a truly great publishing company for the social age and we have a good shot to be the ones who do it. But it means that we can’t take short cuts, we need to always invest in the future, and this is why we spend so much time and money building technology and products that don’t have an immediate impact on the company but will help us down the road.

We could juice our traffic and revenue by dropping everything and focusing entirely on the short term. And that is what companies do when they are trying to flip for a fast payday. But when you are building something enduring, you have to care as much about next year as you do about next week. That is how you build something big and that’s our goal.

2) Respecting our Readers

We care about the experience of people who read BuzzFeed and we don’t try to trick them for short term gain. This approach is surprisingly rare.

How does this matter in practice? First of all, we don’t publish slideshows. Instead we publish scrollable lists so readers don’t have to click a million times and can easily scroll through a post. The primary reason to publish slideshows, as far as I can tell, is to juice page views and banner ad impressions. Slideshows are super annoying and lists are awesome so we do lists!

For the same reason, we don’t show crappy display ads and we make all our revenue from social advertising that users love and share. We never launched one of those “frictionless sharing” apps on Facebook that automatically shares the stories you click because those apps are super annoying. We don’t post deceptive, manipulative headlines that trick people into reading a story. We don’t focus on SEO or gaming search engines or filling our pages with millions of keywords and tags that only a robot will read. We avoid anything that is bad for our readers and can only be justified by short term business interests.

Instead, we focus on publishing content our readers love so much they think it is worth sharing. It sounds simple but it’s hard to do and it is the metric that aligns our company with our readers. In the long term is good for readers and good for business.

3) We Build The Whole Enchilada

Most publishers build their site by stapling together products made by other companies. They get their CMS from one company, their analytics package from another, their ad tech from another, their related content widgets are powered by another, sometimes even their writers are contractors who don’t work for the company. This is why so many publisher sites look the same and also why they can be so amazingly complex and hard to navigate. They are Frankenstein products bolted together by a tech team that integrates other people’s products instead of building their own.

At BuzzFeed we take the exact opposite approach. We manage our own servers, we built our CMS from scratch, we created our own realtime stats system, we have our own data science team, we invented own ad products and our own post formats, and all these products are brought to life by our own editorial team and our own creative services team. We are what you call a “vertically integrated product” which is rare in web publishing. We take responsibility for the technology, the advertising, and the content and that allows us to make a much better product where everything works together.

It is hard to build vertically integrated products because you have to get good at several things instead of just one. This is why for years Microsoft was seen as the smart company for focusing on just one layer and Apple was seen as dumb for trying to do everything. But now Apple is more than twice (!) as valuable as Microsoft and the industry is starting to accept that you need to control every layer to make a really excellent product. Even Microsoft and Google has started to make their own hardware after years of insisting that software is what matters.

BuzzFeed is one of the very few publishers with the resources, talent, and focus to build the whole enchilada. And nothing is tastier than a homemade enchilada.

4) We Are Doing Something Hard

Vertical integration means we have to be good at lots of things which is hard. But doing something hard can actually be an advantage for a business. It means that there are not that many other people trying to do what we do or capable of doing what we do. For example, venture capitalists don’t like funding companies that have reporters on staff. In the early days of BuzzFeed, I had several VCs say they were interested in investing if we could figure out a way to fire all the editors and still run the site. I’m not joking.Tech investors prefer pure platform companies because you can just focus on the tech, have the users produce the content for free, and scale the business globally without having to hire many people. Startups that promise this vision have an easier time attracting funding which is why there are so many startups trying to be the next Twitter or Facebook or the Instagram or Pinterest for X, Y, or Z. Meanwhile, companies that employ reporters, editors, and creative people usually struggle to get funding which is why so few publishing companies or agencies are venture backed.

Fortunately, we have been able to convince a few, smart contrarian investors to back our business including NEA, the biggest venture fund in the world. As one of the few venture backed publishers, we are in a unique position to be one of the leading creators of web content crafted by true professionals. There are lots and lots of things that random, unpaid web users suck at doing. In particular, the best reporting and the most entertaining media is usually created by people who do it for a living – that means us!

5) We Got Lucky!

A big part of our recent success has also been luck. People don’t like to admit it but skill is 63% luck.

In our case, we got very lucky with timing. We were a company focused on making content for people to share just as the social web came of age, at the moment when Facebook and Twitter and other platforms reached scale, and at exactly the moment when it became possible to build a big publishing company through social distribution.

This same lucky shift made our business model work for the first time. A couple years ago, we were trying unsuccessfully to sell social advertising to a market that only wanted to buy banners but things have changed dramatically since then. Now many agencies and brands are refusing to buy banners, companies that rely on traditional display units are suffering, and budgets are shifting rapidly to social advertising. One of our board members, who was initially skeptical of our decision to not run banners, recently said that “social advertising will be the biggest media business since cable television.” Times have changed.

Now we are leading the market, which is a huge opportunity, but it was pure luck that a social advertising market even exists for us to lead. It’s like we happened to start surfing a few minutes before a great wave rolled in. Or we built a locomotive and a few days later the train tracks got built. We were obsessed with social content and ads before anyone else cared and it was extremely lucky that the world shifted toward us when it did. The question now is how well we capitalize on our good fortune.

6) We Don’t Treat Half Our Team Like Losers

BuzzFeed is unique in that we are equally obsessed with 1) entertaining content, 2) substantive content, and 3) social advertising. The teams that focus on each of these areas are equally important which is a key part of our success. We want our cute animals, humor, and animated gifs to be the best of their kind on the web – they aren’t just a cheap way to generate traffic. We want our reporters to have the best scoops, the smartest analysis, and the most talked about items – they aren’t just a hood ornament to lend the site prestige. And we want our advertising to be innovative, inspiring, and lead the shift to social – and not just be a necessary evil that pays the bills.

Some companies only care about journalism and as a result the people focusing on lighter editorial fare or advertising are second class citizens. Some companies only care about traffic which creates an environment where good journalists can’t take the time to talk to sources or do substantive work. Some companies only care about ad revenue and actually force editors to create new sections or content just because brands want to sponsor it.

People don’t do good work when they feel like losers and are second class citizens within their own company. Fortunately we have avoided that problem. We love the silly, we love the substantive, and we love making advertising that is actually compelling. And when we are good at these three things it benefits everyone and the world.

7) Our Awesome Team

This next one will sound a bit cliche and sappy, but a huge reason we are doing well now is…….you. We have an amazing team of extremely talented people who really know what they are doing.

We have a group of culture editors who are insanely tapped into the flow of culture on the web, from 4chan to Reddit to Tumbler to Twitter to Pinterest to blogs to pop culture to memes and know how to add their own ideas to the mix and create entertaining posts that people love to share.

In just the past 6 months (!), we have assembled an incredibly talented group of reporters and writers who are regularly breaking news, unearthing scoops, advancing ideas, and engaging business leaders, US Senators, Presidential candidates, the White House, and leading media outlets. Politics was our first vertical and has already become THE defining outlet of the 2012 presidential campaign and the newer verticals are already on their way to owning there respective areas.

Our teams focused on social advertising are totally killing it, with a consultative sales team full of ideas for clients, a creative services team making incredibly entertaining and sharable ads, a social discovery team expanding campaigns to Facebook, Twitter, and across the web, and an ad ops team that traffics our campaigns with skill, grace, and dogged determination – it’s not surprising we are blowing away all our revenue goals. Gong!

And finally the tech, product, and data teams are inventing and building an unparalleled social publishing platform that powers everything we do, including a massive non-relational realtime stats database that tracks billions of data points for our Social Intelligence Report (launched today!), machine learning system for predicting viral hits, elegant publishing tools for editors, and a beautiful front end design that is continually tested, improved, and evolved with the benefit of smart multivariate testing.

You rock and you keep getting better and better with each passing day. It is really amazing to watch.

But Success Is Fragile…

It’s easy to get excited and arrogant when things are going well but it is important to remember that success is very fragile. Digg sold for $500K after being worth $200 million just a few years ago. In the same time period, RIM, maker of the Blackberry, lost 95% (!) of its value. There is continual disruption in our industry and you are likely to fail if you get complacent or stop evolving.

This is why we met today to discuss our “Next Level” plans and why we are always focused on pushing what we do to the next level. We have done amazing work in the past year and we should all feel proud. But to thrive in the future, we need to stay humble, enjoy the journey, and continually evolve and improve.

There is a widespread belief in technology circles that bundling of cable TV, newspaper, magazine and other information goods will go away now that those products can be distributed à la carte on the internet. The assumption seems to be that bundling is an artifact of another era when distribution was physical. But this reasoning misses the economic logic behind bundling: under assumptions that apply to most information-based businesses, bundling benefits buyers and sellers.

Consider the following simple model for the willingness-to-pay of two cable buyers, the “sports lover” and the “history lover”:

What price should the cable companies charge to maximize revenues? Note that optimal prices are always somewhere below the buyers’ willingness-to-pay. Otherwise the buyer wouldn’t benefit from the purchase. For simplicity, assume prices are set 10% lower than willingness-to-pay. If ESPN and the History Channel were sold individually, the revenue maximizing price would be $9 ($10 with a 10% discount). Sports lovers would buy ESPN and history lovers would buy the History Channel. The cable company would get $18 in revenue.

By bundling channels, the cable company can charge each customer $11.70 ($13 discounted 10%) for the bundle, yielding combined revenue of $23.40. The consumer surplus would be $2 in the non-bundle and $2.60 in the bundle. Thus both buyers and sellers benefit from bundling.

This model is obviously dramatically oversimplified. In real life, bundling tends to flatten the demand curve (here is some background on demand curves, and here is academic paper that presents this argument in rigorous mathematical terms). Suppose the demand curves for ESPN and the History Channel look like this:

The green boxes represent revenue for the seller. The deadweight loss areas to the right of the green boxes are transactions that would have benefited buyers and sellers but are not occurring because the revenue-maximizing prices are set too high.

Now consider what happens when you bundle channels. The key assumption is that individual buyers lie on different x-axis points of the demand curves of different channels. Sports lovers lie on the left of the ESPN demand curve but on the right side of the History Channel curve. To aggregate demand curves, you don’t stack one on top of the other. You add consumers’ willingness-to-pay separately for each channel.

Using the above simplified model, the two demand curves that go from $10 to $3 become one curve that stays flat at $13. In general, adding the individual demand curves creates a flatter demand curve:

A flatter demand curve lets sellers charge prices that capture larger areas under the curve and pass more surplus back to consumers. The only loser is the deadweight loss area.

Some things to note about bundled pricing:

1. Bundled pricing is one reason why subscription models like Spotify should ultimately win out over à la carte models like iTunes. Subscription commerce can also be thought of as a form of bundling.

2. There are other ways to get some of the benefits of bundled pricing – for example versioning goods, and offering bulk discounts.

3. The benefits of bundled pricing are proportionate the buyers’ variance of preferences for the goods. Hence bundled pricing works best in highly “taste-based” goods like media, and wouldn’t have any benefit for fully commoditized goods (e.g. a bundle of stocks)

4. Bundled pricing can also hurt consumers if it is used by incumbents to exploit their broader catalog to “deter entry” by new competitors. This was a common complaint against Microsoft in the 90′s when they bundled applications like Internet Explorer with Windows.

Until last week’s announcement of the new Surface tablet, Microsoft had taken the same approach to mobile devices that they had with PCs: build the software themselves and let partners build the hardware. Google took a similar strategy with Android but then reversed course when they acquired Motorola. Apple’s integrated strategy was once widely ridiculed as a repeat of their losing 1990′s desktop computer strategy, but is now being copied throughout the industry.

There is a trade off between integrated and non-integrated approaches to building devices. The non-integrated approach lowers costs, but adds friction between components that compromises performance. Consider this anecdote from Microsoft’s previous attempts to build tablets with hardware partners:

The H.P. tablet was thick, the Intel processor it used made the device hot, and the software and screen hardware did not work well together, causing delays whenever a user tried to perform a touch action on its screen. “It would be like driving a car, and the car not turning when you turn the wheel,” the former H.P. executive said.

What is the difference between mobile devices today where the integrated approach is winning and desktops PCs in, say, 1995, when the non-integrated approach dominated? The best way to understand the difference is through the lens of Clay Christensen’s disruptive technology theory*. When a new category of device first launches, it is usually not “good enough” for most customers. Chistensen illustrates this with a famous graph:

According to Christensen, technology gets better at a faster rate than customers’ demands on technology do (in the graph, the black line goes up faster than the other lines). Eventually, new device categories become “good enough” (the black line crosses the purple/blue lines), and customers become unwilling to pay significantly higher prices for improved versions of the device. At this point it doesn’t make sense for manufacturers to invest in greater performance if customers won’t reward that investment. Instead, manufacturers should spend the “performance surplus” on making devices less expensive. The best way to do this is to let different companies produce the core software and hardware components, i.e. to switch from an integrated to non-integrated approach.

If you believe Christensen’s theory (and most senior people at large technology companies do), the interesting question now is: when will smartphones and tablets be “good enough” (respectively) for non-integrated to beat integrated approaches? My guess is it will be at least 5-10 years before customers are no longer willing to pay significantly more for faster bandwidth, more features, longer battery life, increased storage, faster processors, etc. But no one really knows.

It isn’t hard to see how Google, Microsoft and pretty much everyone but Apple missed the key difference between PCs and the new generation of mobile devices. Christensen himself missed it:

Christensen’s most embarassing prediction was that the iPhone would not succeed. Being a low-end guy, Christensen saw it as a fancy cellphone; it was only later that he saw it also being disruptive to laptops.

– When Giants Fail: What Business has learned from Clayton Christensen, The New Yorker. [paywall]

Seen as high-end smartphones, iPhones were “sustaining” innovations (above the blue line) that would only appeal to the highest end of the market. Seen as low-end laptops, iPhones were disruptive innovations that would eventually subsume the PC business. With support from the iPad, they seem to be doing exactly that.

* If you aren’t familiar with Clay Christensen, this talk is a great way to learn about his theories.

Firing is awful. You can try to avoid it, but even the most selective founders make serious mistakes. Here are a few things I’ve observed about firing:

1) The good people bounce up, the bad ones bounce down. I was told this by my boss once when he was firing one of my friends. At the time, I thought this just made him feel better about himself. Over time, I’ve seen the wisdom in what he said. Some people who get fired react by fixing their weaknesses. Others spiral down.

2) Do it early. If you think you’re going to fire someone over the next six months, you probably will. Don’t wait too long. Too many founders do. It’s better for management and employees if it happens fast.

3) It’s awful. You’re in control of a situation that will meaningfully hurt someone. It’s an awful place to be. The fired person will go home and tell his/her family about how terrible it was. It was your fault. Perhaps your mismanagement caused it. Who knows. You’ll question it, and perhaps you are right to do so.

4) The other choice is firing everyone. You’re the founder of the company. If you run out of money, you’re forced to fire everyone. If you don’t fire the bad employees, you risk everyone else’s jobs. It’s an impossible situation.

5) The feeling is more likely to be mutual than you think. Most of the time, the person getting fired was already about to quit. The antipathy you feel is likely reciprocated. It’s surprising how often this happens and management doesn’t see it coming.

It would be great if startups were all about growth, hiring, and success. But the reality is that founding a company is a brutal job and lots of the pain gets passed down to employees. Creative destruction sounds nice in textbooks, but in the real world it means telling friends to go home, stop getting paid, and find new jobs.